Insurance should just insure

A few days ago, Sanjiv Bajaj, the Joint CMD of Bajaj Capital, posted on LinkedIn defending traditional insurance products. His central argument was simple: term insurance isn't right for the masses. Most Indians, he argued, need bundled solutions that combine protection with savings because they cannot afford to separate the two. According to him, criticising products like ULIPs and endowment policies misses the reality of how India actually saves.

I disagreed with this view in the comments, and so did several others. But the exchange raises questions that go beyond a LinkedIn debate. At stake is whether we accept that millions of Indian families must receive inadequate life cover because the insurance industry finds pure protection unprofitable to sell.

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I’ll examine Bajaj's argument more carefully. He suggests that for most Indians, bundled insurance products make sense because they address both protection and savings needs simultaneously. This sounds pragmatic until you look at what these products actually deliver. The typical endowment policy or ULIP provides returns of around 6-7 per cent per year, sometimes less. After accounting for inflation, this barely preserves purchasing power, let alone builds wealth. Note that when insurers talk about ULIP “returns,” the number they cite is typically the gross return of the underlying fund before all the policy-level deductions.

Meanwhile, the life cover in these bundled products is invariably too small. A person paying Rs 25,000 annually into an endowment policy might get life cover of Rs 5 lakh or Rs 10 lakh. If this person dies, the family receives this sum, which is nowhere near enough to replace lost income and maintain their standard of living. The same Rs 25,000 spent on term insurance could easily buy Rs 1 crore or more of cover for a young person, providing genuine financial security to survivors.

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So the bundled product fails at both jobs. It provides insufficient protection and poor investment returns. This isn't a theoretical problem. It's why we see so many stories of families left in financial distress despite the deceased having "taken insurance." They were sold products that looked like insurance but provided neither adequate cover nor decent returns.

The claim that term insurance isn't suitable for the masses particularly troubles me. If anything, the opposite is true. Wealthy individuals can perhaps afford inadequate life cover because they have other assets. A poor or middle-class family cannot. They need maximum protection at minimum cost, which is precisely what term insurance offers. Bajaj argues that we shouldn't use a "Western lens" to judge Indian insurance products. But mathematics isn't Western or Eastern. Neither is the principle that insurance should insure. When a family breadwinner dies, the survivors need money to replace lost income. Whether this happens in Mumbai or Manhattan doesn't change anything.

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There’s also an argument that LIC has built enormous trust over decades, and yes, for many Indians, LIC represents their first serious engagement with financial products. But trust is valuable precisely because it should be used responsibly. If LIC used its trusted position to offer proper term insurance at scale, collecting premiums through simple mechanisms and providing substantial life cover, it would serve families far better than selling them products that deliver neither adequate protection nor decent returns.

The real issue here isn't whether individual insurance professionals are well-intentioned. I'm sure many are. The problem is structural. The business model of the insurance industry makes it more profitable to sell bundled products with high charges and poor returns than to sell simple, cheap, effective term insurance. This creates an entire industry devoted to steering customers away from what they actually need towards what generates better margins.

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The test of any financial product is simple: does it do its job well at a reasonable cost? For insurance, the job is to provide substantial life cover when families need it most. Term insurance passes this test. Bundled products consistently fail it. That's not a Western perspective. It's just an honest evaluation of whether products serve their supposed purpose.

The solution isn't complicated. Separate protection from savings. Buy adequate term cover first. Then save and invest through transparent, low-cost, flexible products that are suitable for you. This approach delivers better outcomes for families. The fact that it delivers worse outcomes for insurance companies, their shareholders and their distributors should not be the customer's problem.

Also read: Do not mix insurance and investment